1H18 results are below expectations, due mainly to the higher- than-expected OPEX, forex translation and taxation. Moving forward, the group is set to remain focused on driving improvements at Celcom and XL as well as continuing its group-wide cost optimisation initiatives. Post review, we cut our FY18E/FY19E earnings forecasts by 21%/10%. Downgrade to MARKET PERFORM call with a lower SoP-derived TP of RM4.80.

Below expectations. 1H18 core PATAMI of RM431m (-33% YoY) came in below expectations at 37.4% of our, and 35.4% of the street’s, full-year forecast. On our end, the key negative variances were mainly due to higher-than-expected OPEX, forex translation and taxation in 2Q18. It declared an interim dividend of 5.0 sen (1Q17: 5.0 sen), in-line with expectations. The lower YoY performance was mainly impacted by investments in new digital business; higher D&A charges (as a result from higher capex investment) and tax credit in previous years. Its reported a LATAMI of RM3.5b in 1H18 due mainly to the one-off, non-cash provision of RM3.4b as a result of the de-recognition and reclassification of Idea from associate to simple investment.

YoY, 1HQ18 revenue weakened by 2.7% to RM11.6b, no thanks to unfavourable forex translation impact arising from strengthened RM against its major OpCos’ operating currencies. EBITDA dropped 7.9% to RM4.1b with margin lowered to 35.1% (vs. 37.1% a year ago). At constant currency, revenue grew 7.3% driven by better performance from all major Opcos other than Cambodia operations, while EBITDA improved by 2.5%. QoQ, turnover improved by 2%, thanks to higher contribution from all OpCos. EBITDA grew marginally by 0.4%, attributable to higher revenue but offset by higher OPEX. PATAMI declined more than 100% to a loss of RM3.3b due to the one-off provision of RM3.4b loss on its investment in India. The group’s balance sheet, meanwhile, remained healthy with gross debt/EBITDA of 2.29x in 2Q18 (1Q18: 2.23x). In-line with internal guidelines, c.50% of RM18.7b debt was in USD denominated (of which c.50% were hedged); and 67% of debt was on fixed rate as of end-2Q18.

Celcom’s 1H18 revenue improved by 12% YoY underpinned by solid prepaid growth momentum. Celcom’s focus on high-value customers, simplified product offerings as well as improved sales distribution have started to bear fruits where the group’s subscriber base shown a second consecutive quarter of positive net adds (+27k to 9.6m) with postpaid and prepaid ARPU improving YoY by RM2/RM4 to RM84/RM35, respectively. EBITDA, however, weakened by 14% due to the adoption of MFRS accountancy principle.

Challenging FY18 KPIs. Despite the subdued 1H18 performance, AXIATA is keeping its FY18 KPIs with an aim to achieve flattish revenue/EBITDA annual growth rates. We, however, expect its revenue/EBITDA to dip by 2.5%/5.4% YoY, respectively, in view of the unfavourable currency volatility, and higher gestation period in its digital investments.

edotco remained steady. edotco, a 62.4%-owned subsidiary, recorded sustained growth from expansion of its portfolio and higher tenancy ratio. The division accounted for 6.2% and 7.9% of the group’s total revenue and EBITDA, respectively, in 1H18. It owns a total tower base of 17.3k across the region with 1.59x tenancy ratio (vs. 1.47x a year ago).

Lowered FY18E/FY19E core PATAMI by 21%/10%, after incorporating the lukewarm 1H18 performance and revised our OPEX and taxation assumptions. Besides, we also lowered our FY18 reported LATAMI to RM3.0b (vs. RM2.2b previously).

Downgrade to MARKET PERFORM (vs. OUTPERFORM previously) call with lower SoP-derived TP of RM4.80 vs. RM4.95 previously. Key downside risks include: (i) keener competition, (ii) tax and regulatory challenges, and (iii) currency volatility; Upside risks are: (i) stronger-than- expected recovery at Celcom and XL, and (ii) edotco’s organic and inorganic growth.

Source: Kenanga Research - 27 Aug 2018